Dollar rallies third day of Fed-inspired gains

Greenback sets 1 1/2-year high versus Canadian counterpart

WilliamL. Watts

NEW YORK (MarketWatch) — The U.S. dollar rallied for a third consecutive day on Friday, ending the week on a broadly positive note two days after Federal Reserve Chairman Ben Bernanke signaled that the central bank could begin to cut back the flow of monetary stimulus later this year.

The ICE dollar index
DXY, -0.23%
which tracks the U.S. currency against six rivals, rose to 82.302, up from 81.823 late Thursday in North America.

The WSJ Dollar Index
BUXX, -0.22%
which uses a slightly larger comparison basket than the ICE index, rose to 74.29 from Thursday’s close at 73.84.

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The dollar moves higher versus most major currencies after an early bout of consolidation.

“A broad-based U.S. dollar rally is closer at hand with the Fed expected to slow asset purchases in September 2013. The moves thus far have been against high carry/EM [emerging-market] currencies, and we see this broadening out to include low-yielding currencies” as the second half gets under way, wrote Jose Wynne, strategist at Barclays, in a note.

Also Friday, St. Louis Federal Reserve Bank James Bullard issued a statement detailing his dissent from the Fed’s Wednesday policy decision. He also told the Washington Post that the Fed has indeed adopted a more hawkish stance.

The ICE index is up nearly 2% on the week and is well above its level of around 80.55 on Wednesday, before Bernanke indicated that the central bank could slow the pace of its bond buying later this year if the economy improves further. The rally allowed the index to cut its month-to-date loss to 1.3% and leaves it up more than 3% since the beginning of the year.

But some analysts said scope for further near-term gains may be limited if Treasury yields, which surged in the wake of the Fed remarks, give back some of their rise, analysts said. Moreover, while U.S. yields posted a strong rise in reaction to the Fed, yields have also jumped elsewhere, noted strategists at Lloyds Bank.

At the short end of the yield curve, interest rates for other countries, with the exception of Japan, Switzerland and Norway, have actually outpaced the U.S. rise. “This does not suggest that there is scope for a major extension of the U.S. dollar rally from here, and on balance we would anticipate some correction of yesterday’s U.S. dollar strength today,” the Lloyds analysts wrote.

The British pound
GBPUSD, +0.3296%
traded at $1.5428 in recent action, down from $1.5492 Thursday, while the Australian dollar
AUDUSD, +0.2382%
which was hammered earlier this week, bounced back to 92.45 cents on apparent short covering, up from around 92 cents late Thursday.

A rebound by the euro lost steam with the shared currency
EURUSD, +0.2992%
falling to $1.3138 from late Thursday’s $1.3221 after earlier rising to $1.3254.

Greece has moved back into the spotlight, with talks among the government’s coalition leaders stoking concerns over the durability of the government due to controversy surrounding the closure of state-run broadcaster ERT.

Greece’s Democratic Left party said it would pull out of the coalition government.

Also, news reports said the International Monetary Fund has threatened to suspend Greek aid payments unless euro-zone political leaders move to fill a gap in the aid program. Greek government bonds tumbled, sending yields sharply higher.

But Greek turmoil is unlikely to put lasting pressure on the euro, said Elsa Lignos, currency strategist at RBC Capital Markets.

“The government still has enough MPs for an outright majority (though its hold on power is now more precarious). With tolerance for [euro-zone] negative news at multiyear highs, we would expect limited market reaction unless the government actually falls and elections renew fears of a euro exit,” she said in a note.

The Japanese yen
USDJPY, -0.70%
was also under pressure, with the U.S. currency rising to ¥97.73 from ¥97.38 late Thursday.

While the dollar remained well below its mark at the end of last month, when it traded above ¥100, the mild advance Friday helped Japanese stocks recover from heavy morning losses to swing to strong gains, with the Nikkei Stock Average
NIK, -1.11%
gaining 1.7%.

The U.S. unit was up 0.8% versus its northern counterpart
USDCAD, +0.4519%
to fetch 1.0456 Canadian dollars after Canada reported weaker-than-expected inflation and retail sales data. The pair traded as high as C$1.0488, the highest level since November 2011, according to FactSet.

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